By focusing on meeting arbitrarily set low public debt targets rather than responsible investment, EU economic policy has harmed public services, living standards and our efforts to tackle the climate crisis. The European Commission must now implement a positive, long-term economic approach that provides for investment in health, education, wellbeing and a green future.
Ahead of the COP27 international climate conference, a high-ranking UN official stated: “We had the chance to make incremental changes, but that time is over. Only a comprehensive transformation of our economies and societies can save us from accelerating climate catastrophe.”
This is why the European Commission’s announcement on the review of economic governance will be so important. It will significantly influence whether European governments are able to invest sufficiently in a better and more environmentally friendly future.
The current rules, including the Stability and Growth Pact, forced a ten-year austerity regime following the 2008 financial crisis and damaged European prosperity. European governments cut spending on infrastructure and vital public services, as well as foregoing essential 'green' investments, in a failed attempt to reduce debt and boost GDP.
Repeating these failed economic policies would fatally jeopardise our climate goals. Estimates suggest that the EU needs investments of up to 855 billion euros (excluding transport and investments for biodiversity protection) to tackle the problem of climate change.
The Commission's Green Deal aims to mobilise only a third of these investments from both private and public sector sources. It is also important that, to avoid adding fuel to the fire, the new rules must phase out public investment in polluting industries, particularly fossil fuels.
The political emphasis on reducing public debt was also counterproductive. By cutting spending and investment during periods of private sector instability, these fiscal rules likely led to even higher levels of debt. In countries that implemented the strictest austerity measures, such as Italy and Greece, debt increased and growth declined.
As a recent study by New Economics Foundation and Finance Watch shows, as a result of austerity policies, European governments are currently spending €1,000 less on public and social services per person than they would have spent without these cuts.
If public capital investment had increased at the same rate as before 2008, by 2019, just before the outbreak of the pandemic, public infrastructure stocks would have increased by 533 billion euros.
Austerity measures have left European citizens almost €3,000 per year worse off and have made us less resilient to economic shocks such as those caused by the C19 pandemic and Russia's invasion of Ukraine. Furthermore, it is estimated that the EU was short by at least 142 billion euros per year in investments for social spending, such as healthcare and education.
To improve the quality of life for EU citizens, particularly those with the lowest incomes, significant investment is needed. Even before the energy crisis in 2021, 95.4 million people (nearly 22% of the EU population) were at risk of poverty or social exclusion. Today, more than half of them are exposed to financial risks.
EU government spending rules
The economic governance framework that the Commission is presenting on 9 November is where the EU must start 'transforming our economies from the roots up'.
We must prioritise real economic, social and environmental outcomes that allow everyone to enjoy a warm home, well-paid and decent work, good health and a habitable planet. This begins with a European economic governance system that prioritises long-term environmental and social sustainability over short-term thinking.
Instead, the Commission is likely to propose plans that focus on meeting evidence-free debt and deficit targets.
These rules may be softer than the current version, with less stringent debt reduction schedules and greater involvement for member states in long-term investment and debt reduction, but they will still be based on the budgetary targets that underpinned the austerity policies implemented after the financial crisis.
Under these rules, the eurozone would have to maintain an annual fiscal surplus of 1.1% of GDP for 20 years – a level that would stifle recovery, limit green spending and lower the prosperity of many countries in the long term by reducing tax revenues and increasing the public debt-to-GDP ratio.
Restrictive government spending and a lack of European borrowing after the 2008 financial crisis contributed to asymmetric recovery across different European countries.
Average incomes in Europe have fallen at varying levels. While average disposable incomes in Europe fell by about 11% compared to pre-2008 trends, average incomes in Germany shrank by only 1%. In Finland and the Netherlands, incomes were 15-16% lower. Ireland and Spain were hit hardest, with average incomes falling by 29 and 25 percent respectively.
European citizens across the continent have suffered unnecessarily due to an economic policy system that does not promote sufficient public investment in our future wellbeing. With a difficult winter ahead and the planet facing global warming, we cannot afford to make the same mistakes again. To overcome these growing challenges, we need governments that are capable of investing in people and communities, as well as mitigating and adapting to ecological degradation.
About the author
Sebastian Mang is a Senior Advocacy and Campaigns Officer at the New Economics Foundation, where he works primarily on European economic policy, with a particular focus on fiscal policy.